A Rule of Thumb Gets Shot Down

The inability of Congress to pass legislative reform has provided the courts the occasion to address patent infringement issues, most recently rejecting the commonly used 25 Percent Rule. (Getty Images / Don Farrall)

On Jan. 4, in Uniloc USA Inc. v. Microsoft Corp., the US Court of Appeals for the Federal Circuit continued its trend, without the need for legislative reform, to tighten the standards for establishing patent damages awards by rejecting the commonly used 25 Percent Rule in calculating a reasonable royalty.

Susan M. Dadio

The 25 Percent Rule is a general "rule of thumb" that says a patent infringer should pay 25 percent of the expected profits for the product that incorporates the patent at issue.

Russell L. Parr

One of the greatest obstacles in passing legislative patent damages reform is the diverging interests of the pharmaceutical and biotechnology industries versus the high technology industry. The high technology industry, which develops complex products that include an array of technologies covered by a significantly large number of patents, has been strongly advocating for a limit to the amount of damages awarded in patent infringement cases. On the other hand, the pharmaceutical and biotechnology industries need strong, appropriately valued patents, as their products, which are covered by fewer patents, require substantial time and investment costs when being brought to the market.

Prior to the Uniloc decision, Congress' last attempt to reform patent damages was a Senate proposal in the 111th Congress (2009 to 2011) that involved a compromise approach between the stakeholders whereby the district court judges would serve as a "gatekeeper" in handling damages so as to exclude unsound theories and irrelevant evidence, and provide clear jury instructions. Shortly after the Uniloc decision, patent damages reform legislation was reintroduced in the Senate during the current 112th Congress (as part of S.23: Patent Reform Act of 2011) and contains the same gatekeeper provisions as earlier proposed.

Some judges of the Federal Circuit, which is a specialized court that has exclusive jurisdiction for all patent appeals, have been vocal about their opposition to patent damages reform, believing instead that the courts can handle the issue without further legislation.

The inability of Congress to pass legislative reform addressing patent infringement damages has provided courts the opportunity to address the issue in a series of decisions that have tightened the standards for calculating reasonable royalty rate damages in patent infringement cases. The Uniloc decision is the most recent in this series.